Saturday, July 27, 2019

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July 27, 2019

In China, publication of the Fortune Global 500 has become a major media event. Companies advancing even a place or two rush out press releases. Those making the list for first time bask in the achievement; this year’s most notable Chinese debutant, smartphone maker Xiaomi, celebrated by doling out $24 million in stock to its 20,000 employees.


The 2019 list gives Chinese firms something special to crow about: the number of Chinese firms rose to a record 129, including 10 from Taiwan, overtaking the 121 firms from the United States. As Geoff Colvin observed in an overview of this year’s tally, this is the first time since the creation of the Global 500 in 1990—”and arguably…the first time since World War II”—that a nation other than the U.S. has topped the ranks of global big business. Geoff’s essay bears an apt title: “ It’s China’s World.”


In Chinese, the Global 500 is known as the wubai qiang (五百强), which literally means “500 strong.” And yet, as astute Fortune readers know, the ranking is based strictly on revenue—and is thus a measure of size, not strength. The two can be very different things.


On this year’s list, China’s private firms accounted for some of the most spectacular gains. Xiaomi, which went public only last year, may be the youngest firm to ever crack the Global 500. Chinese property developer Country Garden made this year’s biggest leap, rising 176 places to No. 177. Tech giants Alibaba Group and Tencent Holdings, which debuted on the Global 500 only last year, climbed 118 places to No. 182 and 92 places to No. 237 respectively. Online retailer JD.com jumped 42 places to No. 139.


Even so, the most striking characteristic of China’s presence on the Global 500 remains the overwhelming—and growing—dominance of state-owned firms. A calculation by Hong Kong’s South China Morning Post found that, if firms from Hong Kong and Taiwan are excluded, state-owned enterprises account for 80% of the revenue generated by Chinese companies on the 2019 list, up from 76% last year.


Derek Scissors, resident scholar at the American Enterprise Institute, argues the prevalence of state-owned behemoths among Chinese firms “reveals more weakness than strength.” He questions whether firms like Ping An Insurance Group (No. 29) and Huawei Technologies (No. 61) are truly private; doubts the veracity of financial results reported by China’s state-owned firms; and notes that Chinese SOEs are mostly sleepy monopolies. The vast revenue of state-owned Chinese companies on the Fortune 500, he concludes, “primarily represents waste.”


Former Financial Times China correspondent Richard McGregor offers a more nuanced explanation for the ascendance of China’s state-owned giants in his new book Xi Jinping: The Backlash. For China watchers, the entire book is a must-read, but this excerpt published recently in The Guardian, summarizes Richard’s account of how and why Xi sought to bolster state-owned enterprises at the expense of private enterprise.


I’m contemplating the distinction between size and strength this morning because I write from Tokyo, where eons ago I covered the collapse of Japan’s “bubble economy” for the Wall Street Journal. The unmistakable lesson of that era: propping up big, unprofitable companies preserves stability and government control—at the expense of growth and innovation.


More China news below.






Clay Chandler
– clay.chandler@fortune.com
– @ClayChandler



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Economy and Trade


Trade talks. Trade war negotiators are due to meet in Shanghai next week. A statement from the White House said talks will begin on July 30, with the regular crowd of Robert Lighthizer, Steven Mnuchin and Liu He. Caixin


Trade balks. China's exports for the first half of 2019 rose just 0.1%, with exports to the U.S. retreating 8.1% – but Chinese imports of U.S. goods dropped a steeper 30%, with imports sliding 4.3% overall. South China Morning Post


A developing issue. President Trump delivered an ultimatum to the WTO, calling on the organization to terminate a provision that allows countries to self-determine whether they are a "developing" economy. Close to two-thirds of the WTO's 164 members claim "developing" status, but Trump's outrage is directed specifically at China. Trump's administration said if progress on the provision isn't made in 90 days, the U.S. would decide for itself which countries to treat as "developing" economies. New York Times


Digging out the farmers. The Trump Administration is preparing a $16 billion relief package for U.S. farmers hurt by the trade war. Agriculture Secretary Sonny Perdue said the grant shows that President Trump recognizes farmers are "fighting the fight" against China. Trump previously said China is "letting [the U.S.] down" by not buying more agriculture products, with soybean shipments hitting a 16-year low. Guardian


Innovation and Tech


A new bourse on the Bund.  China's new tech stock exchange, the Nasdaq-style STAR board in Shanghai, had a tumultuous debut this week when 25 companies launched on the bourse Monday. And launch they did – the average share price shot up 140% on the first day. Shares in Anji Microelectronics Tech, a semi-conductor maker, rocketed 400%. But what goes up comes down, and 9% was wiped off the board's accumulative market cap on Tuesday as investors retreated. Fortune


A new satellite in the sky. Sticking with stars a moment – iSpace became China's first private company to launch a satellite into orbit on Thursday. The start-up is just three years old and beat out two competitors in the field, which launched failed attempts to boost rockets into orbit earlier this year. Quartz


New clouds on the horizon. Alibaba has become the exclusive provider of Salesforce cloud services in greater China through a partnership with the U.S. company that secures Salesforce as Alibaba's exclusive customer relationship management (CRM) suite offering. Beijing requires foreign tech companies to partner with local companies to process Chinese data, so a partnership was Salesforce's only way in. Financial Times


A new beat for Bytedance. TikTok, the viral short-video app, has reportedly bought London-based AI start-up Jukedeck, which develops A.I. that can scan videos and automatically compose music to fit the setting. TikTok hasn't confirmed the purchase but all the Jukedeck tema have changed their LinkedIn profiles to indicate they're working at Bytedance, TikTok's parent. Bytedance is reportedly planning to launch a Spotify-like music streaming service this year too. TechCrunch


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Content From Deloitte

Making AI Ethical 


With an increasing number of companies using artificial intelligence in their operations, ethical concerns are now coming to the fore. Rather than wait for regulation, businesses may start to tackle these issues on their own. Deloitte explains.


Read more  


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In Case You Missed It


China Needs New Places to Sell Its Mountain of Stuff NYT


How to Choose Between the U.S. and China? It's Not That Easy The Atlantic


Li Peng, Ex-Chinese Premier and Tiananmen Hard-Liner, Dies at 90 WSJ



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Politics and Policy


Hong Kong gets aggressive. Tension has ramped up in Hong Kong, again. A spokesperson for China's Defense Ministry reminded Hong Kong authorities that they can request assistance from the People's Liberation Army days after protestors marched on Hong Kong's Beijing liaison office and defaced the seal of the People's Republic of China. Meanwhile, thugs – likely members of Triad gangs – armed with sticks ambushed protestors returning home to one of Hong Kong's far-flung districts, Yuen Long. The police were criticized for their slow response and protestors occupied the arrivals hall at Hong Kong International Airport on Friday. South China Morning Post


China gets defensive. Beijing issued a white paper on defense for the first time since 2015 in which it accuses the U.S. of undermining "global strategic security." The white paper criticized the U.S. for, amongst other things, deploying its THAAD anti-missile system in South Korea – a three-year-old dispute that still rankles – and for selling weapons to Taiwan more recently. Taiwan was also accused of "pursuing a path of separatism," as were actors in Tibet and Xinjiang. South China Morning Post


 


This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.


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